Offsets Awarded In Broker-Dealer Promissory Note Cases

Recently, the Securities Arbitration Commentator surveyed various FINRA cases and found that in a majority of cases between employees and their member firms in which the member-firm claimant asserted a promissory note or loan default claim, the member-firm usually recovered at least the amount of the unpaid balance of the promissory note or loan. There is a rising trend, however, for FIRNA arbitration panels to offset the unpaid loan balance and issue reduced awards when the former employee respondent raises viable counterclaims.

For example, in Morgan Stanley Smith Barney, LLC vs. Kevin Meredith McCoy, III, Case No. 10-03294 (Houston, Texas, April 27, 2011), Morgan Stanley Smith Barney, LLC (“Morgan Stanley”) filed a claim against its former employee, Kevin Meredith McCoy, III (“McCoy”), alleging breach of promissory note and requested compensatory damages in the amount of $88,000, which represented the unpaid balance of McCoy’s promissory note since the date of his termination from Morgan Stanley. In response, McCoy filed a counter-claim alleging that in violation of his employment agreement, Morgan Stanley changed its compensation structure for its employees and as a result, McCoy was no longer paid for household accounts that invested under $100,000 in total assets which resulted in his termination. The sole arbitrator presiding over the matter determined that based upon evidentiary Focus Reports and testimony of McCoy’s former branch manager, McCoy lost $14,000 in compensation as a result of Morgan Stanley’s change in the compensation policy. As such, the arbitrator held that McCoy was liable to Morgan Stanley for compensatory damages, interest and attorneys’ fees, however reduced the compensatory damages amount owed to Morgan Stanley by the $14,000 in lost compensation.

Similarly, in Citigroup Global Markets, Inc. vs. Suzanne LaTour, Case No. 09-07032 (San Diego, California, May 5, 2011) Citigroup Global Markets, Inc. (“Citigroup”) asserted breach of contract and restitution causes of action against its former employee Suzanne LaTour (“LaTour”) and sought the unpaid balance of LaTour’s promissory note. LaTour filed a counter-claim against Citigroup asserting breach of contract, breach of implied covenant of good faith and fair dealing and request for stay or dismissal of arbitration proceeding. The majority of a three-member arbitration panel awarded Citigroup compensatory damages for the outstanding balance of LaTour’s promissory note, but offset that amount by the pro-rata share of LaTour’s next forgivable installment payment under the note that she would have earned had she not been terminated. Interestingly, one of the arbitrators dissented as he held that Citigroup was not the “holder” of the promissory note under New York law, and therefore, could not enforce it against LaTour.

Moreover, in UBS Financial Services, Inc. vs. William Hunter Brennan vs. Shane Gavin Springman, Case No. 10-01371 (Detroit, Michigan, August 1, 2011) UBS Financial Services, Inc. (“UBS”) filed a claim against William Hunter Brennan (“Brennan”) and Shane Gavin Springman (“Springman”) for breach of their forgivable loans which became due upon the termination of their employment with UBS. The sole public arbitrator presiding over the matter issued an award which stated that although UBS hired Brennan and Springman in order for them to open a new branch office in Kalamazoo, Michigan, UBS was unable to “carry out its plans for a fully functional, profitable Kalamazoo office,” since UBS required Brennan and Springman to move their business to a new location in Grand Rapids, Michigan. See Award, page 3. The arbitrator concluded that “UBS changed a significant understanding, admittedly unwritten, of perhaps the most important condition of the initial employment, i.e., the location – the city – where [Brennan and Springman] were assigned to work.” Id. As a result, the arbitrator reduced the compensatory damages, interest, and attorneys’ fees Brennan and Springman owed UBS by 40%.

Additionally, in Merrill Lynch, Pierce, Fenner & Smith Incorporated vs. Barbara Jean Horvath, Case No. 11-00911 (Los Angeles, California, October 23, 2012) Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) asserted breach of promissory note and unjust enrichment claims against Barbara Jean Horvath (“Horvath”). Horvath asserted the following counterclaims against Merrill Lynch: wrongful termination; breach of implied covenant of good faith and fair dealing; intentional interference with contractual relations; intentional interference with prospective economic advantage; breach of contract; unlawful, deceptive and/or unfair business practices; and money had and received. The arbitration panel held that although Horvath was liable to Merrill Lynch for an unpaid promissory note balance in the amount of $418,344, Merrill Lynch was liable to Horvath for an amount of $1,235,000, which offset any amounts owed by Horvath. The arbitration panel also held that Horvath’s Form U-5, filed and maintained by the Central Registration Depository (“CRD”), was to be changed to include language that Horvath was terminated “as a pretext related to internal problems with the handling of certain short sales and penny stock trades.” See FINRA Award, Case No. 11-00911, page 3.